Inflation

Inflation is defined as the change in the level of prices. Most of the time, people mean the "Consumer Price Index" or "CPI" when they discuss inflation in a country. This is the change in the price "shopping basket" of consumer goods for a country that the national statistics agency has sampled over time on a monthly basis. The "core CPI" is the change in prices without the food and energy components, or "ex food and energy". Since food and energy prices are volatile, the "core CPI" is thought to be a more accurate measure of underlying inflation.

The main challenge in measuring inflation as the change in level of prices is establishing which prices to use for the calculation. National statistics agencies usually measure various inflation rates:

* The "raw materials price index" (RPI), or so-called "crude goods" price index, which measures commodity price inflation;

* The "industrial product price index" (IPPI), which measures changes in the wholesale price of goods at 'the factory door'; and

* The "consumer price index" (CPI), which measures the change in retail prices.

Since economists, market strategists, and politicians are usually concerned with changes in consumer prices, the CPI is the most frequently used measure of price change. Across a country, however, prices vary with market conditions, availability, transportation costs and other factors.

For example, the price of unleaded gasoline varies across Canada by a significant amount. This reflects the transportation costs involved, the supply of gasoline in each region, and most importantly the gasoline sales taxes in each province since these vary considerably by province. To properly measure these differences, Statistics Canada measures the CPI in each major urban centre and forms a sample by province and territory. It then combines them on a weighted basis to create the national Canadian CPI index. It is not unusual to have major differences, as much as 1-2%, in the CPI between different provinces and cities. This means where you live has a major impact on whether the CPI is a proper measure of your inflation.

Another issue is the appropriateness of the sample of goods and services which form the "basket of goods" for the CPI to consumers. Statistics Canada actually samples prices by having "shoppers" visit retail stores on a monthly basis and price consumer goods and services. The basket of goods is selected and weighted according to a specific year, and updated only over longer time periods.

The Canadian CPI was based on a 1980 sample of goods and not updated until 1995. This meant that the buying patterns of consumers in 1994 were assumed to be those from 1980. The rapid changes in our society meant that some goods important to 1994 consumers were not counted appropriately in the CPI because of its 1980 weightings. Some goods and services commonly used by consumers in 1994 had not even been thought of in 1980. Examples of this would be the home computer, automobile air bags and many consumer electronics.